A history of public debt in Australia

Katrina Di Marco, Mitchell Pirie and Wilson Au-Yeung 1

Understanding debt and its historical trends is important, as the level of debt provides one
measure of the strength of public finances. Levels of public sector borrowing fluctuate in line with
the economic cycle and the budget position. This paper briefly describes the various measures
of debt and trends in government borrowing.

1 The authors are from the Budget Policy Division, the Australian Treasury. This article has
benefited from the contributions and comments of Jason Allford, Derek Bazen, Jan Harris,
Karen Incher, Luise McCulloch, Tony McDonald, Robert Seaton and Gene Tunny. Timothy
McGuire provided research assistance. The views in this article are the views of the authors
and not necessarily those of the Australian Treasury.

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A history of public debt in Australia

Introduction
Understanding debt and its historical trends is important, as the level of debt provides
one measure of the strength of public finances. Governments’ borrowings to finance a
budget deficit are collectively referred to as public debt. Over time, government
borrowings add to the stock of public debt, but may finance things such as purchases
of assets.

This article provides a brief analysis of Australia’s public debt. It describes the various
ways of measuring public debt and what these measures tell us about the strength of
the government’s finances. The article summarises the history of Australia’s public
debt, for both the Australian and State governments.

Concepts of debt
Before analysing historical trends in Australia’s public debt, it is important to
understand the concepts of gross debt and net debt and what information they
provide.

Gross debt
Gross debt represents a portion of the total liability a government owes to creditors.
The International Monetary Fund (IMF) Government Finance Statistics (GFS) manual
defines gross debt as:

All liabilities that require payment or payments of interest and/or principal by

the debtor to the creditor at a date or dates in the future. Thus, all liabilities in
the GFS system are debt except for shares and other equity and financial
derivatives [paragraph 7.142].

The main component of gross debt on the Australian Government’s balance sheet is
Commonwealth Government Securities (Treasury Bonds) outstanding.

While the gross debt measure provides information on government finances, it is only
a partial indicator. Gross debt does not incorporate amounts that are owed to
government by other parties. Also governments, like an individuals or businesses,
hold assets which can be sold to meet their financial obligations. To capture the asset
side of equation, net debt needs to be considered.

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 A history of public debt in Australia

Net debt
Broadly speaking, net debt is equal to gross debt less a related pool of financial assets. 2
Table 1 gives a simple representation of the main components that are included and
excluded from the Australian Government’s net debt calculation.

Table 1: Components of net debt

What is in
Liabilities (add to net debt)
Government securities
(that w e have sold to others)
Loans and other borrow ings
What is out
Superannuation liability
Source: The Australian Treasury
Assets (subtract from net debt)
Cash and other deposits
(including cash investments in Funds)
Debt securities that the Government ow ns
(eg State and Territory Government bonds)
HELP Loans
IMF capital subscription
Equities (eg shares held by the Future Fund)
Non-financial assets

Net debt is the most commonly quoted and well-known measure of a government’s
financial strength. One of the reasons is that it is part of everyday life for businesses
and households. Another reason is that, historically, it was the only available stock
measure for governments who were recording financial information in a cash-based
accounting system. Finally, it is a measure that is internationally comparable, given
most OECD countries report on it.

Compared with gross debt, net debt is a better measure of a government’s overall
indebtedness as it also captures the amount of debt owed to the government. Still, like
gross debt, net debt is only a partial indicator of the government’s financial strength, as
not all government assets or liabilities are included. As an example, unfunded
superannuation is not included in the calculation of net debt. On the other side of the
ledger, the equity holdings of the Future Fund are also not included as an asset in the
calculation of net debt.

International comparisons of net debt and gross debt

Chart 1 compares the gross debt and net debt position of the general government
sector in the G-7 countries.

2 In terms of the Australian Government’s balance sheet, net debt equals the sum of deposits
held, advances received, government securities, loans and other borrowing, minus the sum
of cash and deposits, advances paid, and investments, loans and placements.

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A history of public debt in Australia

Chart 1: G-7 countries’ gross debt and net debt (2008)

Per cent of GDP Per cent of GDP
200 200

150 150

100 100

50 50

0 0
UK US Germany France Canada Italy Japan
Gross debt Net debt
Source: OECD Economic Outlook 84.

The case of Japan most clearly illustrates how only considering gross debt can result in
a skewed interpretation of government finances. Using the gross debt measure, Japan,
at 173 per cent of GDP, appears to have the highest debt level of the G7, well above the
level of Italy. When the net debt measure is used, Japan and Italy have similar net
debt- to-GDP ratios.

Similarly Canada, which has a comparable amount of gross debt to France, Germany
and the US, has a significantly lower level of net debt than those countries.

The examples illustrate that care needs to be taken when using gross debt to compare
across countries and over time.

International comparisons of net debt over time

Australia has had historically low levels of net debt over the past two decades
compared with the G-7 economies (Chart 2). In the early 1990s, Australia, along with
the major economies, experienced an increase in net debt largely because of the global
downturn. But in contrast to other economies, after 1995, Australia experienced a
significant fall in its net debt.

In the period ahead, the net debt positions of the major OECD economies, including
Australia, are again expected to grow as a result of the deteriorating global economic
outlook and the need to introduce significant fiscal stimulus measures. The capacities
of governments to respond to the deteriorating global economic outlook will be

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 A history of public debt in Australia

different. These differences in capacity largely stem from differences in the initial
strength of government finances and differences in the capacity of economies to grow. 3

Chart 2: Australian and G-7 public sector net debt

Per cent of GDP Per cent of GDP
120 120

100 100

80 80

60 60

40 40

20 20

0 0

-20 -20
Australia UK US Germany France Canada Italy Japan
1992 2000 2008 2010
Source: Australian Treasury and OECD Economic Outlook 84 (November 2008). Net debt figures are from
the OECD Economic Outlook 84 except for Australia’s 2010 figure which is the sum of the most recent
forecasts for Australian, State and Territory general government sector net debt levels for financial year
2009-10.

Chart 2 reinforces Australia’s relatively strong position with significantly lower levels
of net debt projected in 2010 than the G-7 countries, even after introducing stimulus
measures. Australia’s projected net debt position, across all Government’s is estimated
to be 1 per cent of GDP compared with 48 per cent of GDP for the OECD.4

Other measures of financial position

Over time, the demand for greater public accountability has led governments to
publish more comprehensive sets of fiscal data. This has resulted in a trend towards
using accrual accounting measures. By introducing a balance sheet into the primary
Budget documents from 1999-2000, the Australian Government has been able to
measure net financial worth and net worth.

3 These are factors that ratings agencies consider. For a useful summary see Moody’s Special
Comment, How far can Aaa governments stretch their balance sheets?, February 2009.
4 The OECD figure has not been updated from the OECD Economic Outlook 84 published in
November 2008. This figure is expected to be higher given the further deterioration of the
global outlook and further stimulatory measures announced by governments.

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A history of public debt in Australia

• Net financial worth is defined as total financial assets less total liabilities.

• Net worth is defined as total assets less total liabilities.

Both measures are conceptually better than gross debt and net debt at capturing the
Australian Government’s financial strength, as they are more comprehensive.

The difference between the two measures is the inclusion of non-financial assets in net
worth. Given concerns surrounding the valuation of non-financial assets and their
liquidity in the face of adverse shocks, the Australian Government has decided to use
net financial worth as its primary indicator of balance sheet sustainability. 5

Trends in the level of public debt

Trends in public sector gross debt
Colonial gross debt (pre-Federation)
At different times in Australia’s history, governments have had to borrow to fund
cyclical revenue shortfalls or to finance large infrastructure projects.

During the period 1850-1900 colonial governments played a central role in the
construction of economic infrastructure. According to Butlin, Blanchard and Pincus
(1982), between 1860 and 1900, public expenditure accounted for 40 per cent of
domestic capital formation.

A large share of the capital expenditure was financed through borrowing, with gross
debt rising from around 3 per cent of GDP in 1855 to around 100 per cent of GDP in
1900 (Chart 3). A very small stock of local capital meant that public borrowing,
through the issuance of securities, was largely undertaken in London (Attard 2007).
The securities that were issued, which were colloquially known as ‘Colonial Consols’,
traded at yields well below comparable securities offered by the Australian private
sector (Butlin, Blanchard and Pincus 1982).

Between 1856 and 1880, on average around 73 per cent of Australia’s colonial debt was
issued in London (Chart 4).

5 See the discussion in Budget Paper No. 1, Budget Strategy and Outlook 2008-09.

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 A history of public debt in Australia

Chart 3: Gross debt Chart 4: Debt issued in London as a

share of total Australia’s colonial debt
issued
Per cent of GDP Per cent of GDP Per cent of total Per cent of total
140 140 120 120

120 120 100 100

100 100
80 80
80 80
60 60
60 60
40 40
40 40

20 20 20 20

0 0 0 0
1855 1870 1885 1900 1856 1864 1872 1880

Source: Australians - Historical Statistics 1987. Source: Attard 2007.

Australian Government gross debt

For the first decade following Federation, the Australian Government did not have any
public debt as budget revenues exceeded outlays. The first debt recorded on the
Australian Government’s balance sheet was debt transferred from South Australia on
1 January 1911, when the administration of the Northern Territory and the Port
Augusta to Oodnadatta railway was passed to the Australian Government (Australian
Office of Financial Management (AOFM) 2003-04).

The first public bond issue in Australia was conducted in 1915 as part of financing the
First World War (AOFM 2003-04). Foreign borrowing also played an important role in
the raising of debt in the years prior to the Second World War (Box 1).

During the First World War, gross Australian Government debt increased from around
2.2 per cent of GDP to around 50 per cent of GDP (Chart 5), with around one-third of
this increase met through loans issued in London (AOFM 2003-04). By comparison
with the First World War, the financing requirements of the Second World War were
met largely through domestic borrowing. Gross Australian Government debt
increased from around 40 per cent of GDP in 1939 to around 120 per cent of GDP in
1945. During both wars, War Savings Certificates, targeted at retail investors, were the
primary instruments used to raise funds.

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A history of public debt in Australia

Chart 5: Australian Government public debt (at 30 June) 6

Per cent of GDP Per cent of GDP
140 140

120 120

100 100

80 80

60 60

40 40

20 20

0 0
1908 1918 1928 1938 1948 1958 1968 1978 1988 1998 2008

Source: Data from 1908 to 1982 are from Barnard Source Papers in Economic History 1986. Commonwealth
Government Securities on issue is used for the period 1983-2008. For consistency reasons, GDP data for
1908 to 1982 are derived from Source Papers in Economic History 1986. GDP data for the period 1983 to
2008 are from the ABS National Accounts, cat. no. 5206.0.

Australian Government debt was progressively reduced after the Second World War
and largely eliminated by the beginning of the 1970s. In the decade following the
Second World War, relatively tight fiscal policy halted the growth in gross debt, while
high inflation underpinned the sharp reduction in gross debt as a share of GDP. By
1974, gross debt had declined to around 8 per cent of GDP from a peak of around
120 per cent of GDP in 1946.

There were two further episodes of debt accumulation, and subsequent reduction,
during the 1980s and early 1990s driven by periods of weak economic growth and
associated budget deficits. From the mid-1990s, as the Australian Government’s fiscal
position improved, gross debt declined steadily as a share of GDP.

6 Care needs to be taken when making comparisons over time due to structural breaks in the
series. These include the move from cash to accrual accounting and the change to
market-to-market accounting for debt.

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 A history of public debt in Australia

Box 1: Australian Government foreign currency debt

The Australian Government historically had a significant proportion of its debt
denominated in foreign currencies, but foreign-denominated debt is now negligible
(Chart A).

For the first 30 years after Federation, foreign currency debt made up around
35 per cent of total debt on issue. A large portion of this debt was financed from
London. Between 1940 and 1950 the amount of foreign currency debt fell as domestic
markets grew in size. After the Second World War, the value of foreign currency loans
began to rise to finance balance of payment deficits (AOFM 2002-03).

The share of foreign currency borrowings of the Commonwealth Government

Securities (CGS) portfolio remained around 30 per cent from 1970 until 1988. In 1988,
the Government decided to concentrate debt issuance in domestic markets to maintain
liquidity and efficiency.

Capital account liberalisation has underpinned an increase in foreign holdings of

Australian dollar-denominated CGS since the early 1980s (Chart B).

Chart A: Overseas loans Chart B: Foreign holdings

(per cent of CGS portfolio) (per cent of CGS portfolio)

Per cent Per cent Per cent of total Per cent of total
60 60 75 75

40 40 50 50

20 20 25 25

0 0 0 0
1920 1942 1964 1986 2008 1979-80 1987-88 1995-96 2003-04

Source: AOFM 2002-03 Annual Report. Source: RBA Australian Economic Statistics.

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A history of public debt in Australia

Trends in Australian Government net debt

There has only been a formal recording of net debt data for the Australian Government
since 1988. The Treasury has developed a net debt series for 1972-88 to allow better
comparison across time (Treasury 1996).

Chart 6 shows that the Australian Government has historically had a positive net debt
position — that is, the value of debt liabilities has exceeded the value of debt assets.
Since 1970-71, net debt has averaged 5.7 per cent of GDP, reaching a peak of
18.5 per cent in 1995-96, and a low of -3.8 per cent of GDP in 2007-08. Changes in net
debt have largely been driven by changes in the government’s budget position. 7
Especially in the 1990s, asset sales have also been a significant contributing factor
(Box 2).

Chart 6: Australian Government net debt to GDP

Per cent of GDP Per cent of GDP
20 20

15 15

10 10
Average

5 5

0 0

-5 -5
1970-71 1975-76 1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11

Source: Mid-Year Economic and Fiscal Outlook 2008-09 and Updated Economic and Fiscal Outlook
November 2008 and the Australian Treasury.

During the early 1970s net debt was mainly negative and reached lows of -3.1 per cent
of GDP. During the first half of the 1970s budget surpluses averaged 1.7 per cent of
GDP, while in the second half, there were budget deficits averaging around —
1.6 per cent of GDP. By 1979-80, net debt was around 4.7 per cent of GDP.

7 For a summary of trends in fiscal policy in Australia see Kennedy, Luu, Morling and Yeaman
(2004) and Gruen and Sayegh (2005).

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 A history of public debt in Australia

Net debt reached 10.4 per cent of GDP in 1985-86. It took only three years (from
1986-87 to 1989-90) to reduce net debt by around 6 percentage points of GDP. Across
those same years, the underlying cash balance averaged around 0.6 per cent of GDP.

During this same period, the current account deficit was on the rise and reducing the
Government’s call on foreign capital was an important driver of fiscal policy
(Kennedy, Luu, Morling and Yeaman 2004). As a result, in 1988, the government
decided to concentrate its debt issuance in Australian dollars (Box 1). In 1987,
30 per cent of total borrowings were in foreign currencies. By 1990-91 it was around
21 per cent.

In the early 1990s recessions in many advanced economies caused a marked slowing in
the world economy. The government implemented a more expansionary fiscal policy
that was funded by borrowing. Net debt reached a peak of 18.5 per cent of GDP in
1995-96.

From 1995-96 onwards, the government undertook a program of fiscal consolidation

(Kennedy, Luu, Morling and Yeaman 2004). The government also undertook
significant sales of Public Trading Enterprises around this period (Box 2).

The combination of successive budget surpluses and asset sales led to the elimination
of net debt. Net debt as a proportion of GDP gradually declined to its historical low of
-3.8 per cent of GDP in 2007-08.

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A history of public debt in Australia

Box 2: Sale of major Commonwealth Publicly Traded Enterprises

(PTEs) 8
The Australian Government started a program of asset sales in 1987. These sales
were largely conducted through trade sales (which involves a tendering process) or
through public offerings of equity. The early asset sales were largely contained to
property rather than PTEs. This changed in the early 1990s, with a marked increase
in the sale proceeds from PTEs (Table A).
Table A: Major privatisations
Asset Tim e Sale Proceeds
$m
Telstra 1997,1999, 2006 45,600
Commonw ealth Bank of Australia 1993,1996,1997 6,800
Airports 1997,1998,2002 8,301
Qantas 1993,1995 2,115
Source: Department of Finance and Deregulation website.

Cumulative budget surpluses and proceeds from the sale of major PTEs,
contributed to reducing net debt to its low of -3.8 per cent of GDP in 2007-08 from
its peak in 1995-96. Of this, PTE sales contributed around $61 billion, to reduce net
debt. Chart A shows the proceeds of PTE sales as a share of GDP from 1987-88.

Chart A: Value of major PTE sales (per cent of GDP)

Per cent of GDP Per cent of GDP
3 3

Telstra - 1st
Tranche and
Phase 2 airports Telstra - 3rd
2 Tranche 2
Commonw ealth Bank
and Phase 1 airports
Telstra - 2nd
Tranche
Commonw ealth Bank
1 and Commonw ealth 1
Sydney
Serum Laboratories Airport

0 0
1987-88 1991-92 1995-96 1999-00 2003-04 2007-08

Source: Department of Finance and Deregulation website and author’s calculations.

8 For an in-depth discussion on asset sales, readers are referred to the Reserve Bank Bulletin
article ‘Privatisation in Australia’ (1997).

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 A history of public debt in Australia

Recent trends in state net debt

The ratio of aggregate state net debt to GDP declined steadily from the early 1990s
until 2006-07, as state governments adopted fiscal strategies to reduce debt levels
primarily through expenditure restraint but also through revenue increases and asset
sales. Chart 7 illustrates recent trends in aggregate state net debt-to-GDP ratios
(Budget Paper No. 3 2008-09).

Since 1998-99 states have been running an aggregate general government sector
positive net operating balance. This illustrates that state borrowing, in aggregate, has
not been occurring to fund recurrent expenditure. State borrowing chiefly occurs in the
public non-financial corporations sector, where it relates to infrastructure required by
those government-owned corporations to deliver the services they provide.

From 2006-07 state- and local-level non-financial public sector net debt began trending
upwards, primarily reflecting the financing of state government infrastructure projects,
particularly by public non-financial corporations.

Chart 7: State net debt

Per cent of GDP Per cent of GDP
40 40

30 30

20 Estimates 20

10 10

0 0

-10 -10
1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 2007-08
General government sector Aggregate
Public non-financial corporations Non-financial public sector
Source: Budget Paper No. 3, Australia’s Federal Relations 2008-09.

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A history of public debt in Australia

Conclusion
A government’s balance sheet comprises both assets and liabilities. This article has
demonstrated that only considering gross debt can result in an incomplete picture of
public finances. By taking into account assets the public sector owns, a more accurate
view of a government’s ability to respond to economic conditions can be determined.

This article has shown that Australia has undergone several periods of debt
accumulation, followed by periods of fiscal consolidation. Periods of strong economic
growth following episodes of debt accumulation have helped support relatively quick
improvements in the public sector’s net debt position. Australia has a low level of net
debt both historically and when compared with G-7 economies.

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 A history of public debt in Australia

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Australian Office of Financial Management 2003-04, Annual Report, Review: Foreign

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Boot, H M 2000, ‘Government and the Colonial Economies: A Reply to Frost’,

Australian Economic History Review, Vol. 40, No. 1, March.

Butlin, N G, Barnard, A and Pincus, J J 1982, Government and Capitalism, George Allen
and Unwin Australia Pty Ltd.

Budget Paper No. 3, Australia’s Federal Relations, 2008-09.

Groenewegen, P 1990, Public Finance in Australia, Prentice Hall.

Gruen, D and Sayegh A, 2005, ‘The Evolution of Fiscal Policy in Australia’, Treasury
Working Paper No. 4, November.

International Monetary Fund 2001, Government Finance Statistics Manual, Chapter 7:

The Balance Sheet.

Kennedy, S Luu, N Morling, S and Yeaman, L 2004, ‘Fiscal Policy in Australia:

Discretionary Policy and Automatic Stabilisers’, Paper prepared for the
Treasury/Australian National University Macroeconomic Conference.

Moody’s Investor Services, How Far Can Aaa Governments Stretch Their Balance Sheets?,
February 2009.

Reserve Bank of Australia, Privatisation in Australia, Reserve Bank of Australia Bulletin,

December 1997.

Treasury ‘Australia’s century since Federation at a glance’, Economic Roundup

Centenary Edition, 2001.

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